2014 Outlook

Supply, Consolidation Top Marketer Concerns for 2014Propane marketers of all sizes have a lot on their minds as we enter the new year. Consolidation continues to affect the industry as limited liability companies and majors continue snapping up smaller firms. Some suggest those mergers may leave customers missing the human touch of the smaller companies, depending on the changeover. Meanwhile, residential business is still a challenge as homeowners continue the conservation habits of past decades, which only accelerated following the economic recession of 2008. However, marketers are also looking toward positive signs, such as the nice cold-weather start to this heating season, which came right on the heels of a robust fall crop-drying season. Both events have spiked demand this fall and winter and are keeping marketers running to fill fuel orders, a rosier scenario, certainly, than the non-winter of 2011-2012 and thin grain drying demand during the past few harvest seasons.

But when asked about their outlook for the propane industry in 2014, several marketers zeroed in on increased exports as a top issue of concern. Shale gas production has driven up propane supply to unprecedented levels, yet producers are exporting vast amounts because attractive selling opportunities exist abroad for lower-priced U.S.-sourced product. Meanwhile, the price of propane, which could be expected to be lower with the increased supply, showed gains at an accelerating pace at the end of 2013. Market watchers note that propane prices might actually have to exceed 160 cents/gal. before exports will no longer be attractive to overseas buyers. At the same time, gallons have already been contracted far into the future, and it is estimated that current exports are in the range of 288,000 bbld. And more export infrastructure is in the works to facilitate additional volumes moving abroad.

Propane marketers are paying attention, and some, rightly or wrongly, blame exports as a major overlying cause of higher propane prices here. However, midstream operators counter that, based on established historical demand and an actual decline in the U.S. requirement, sufficient gallons have been assigned to the domestic market, leaving it supplied and satisfied. They further argue that the ramped-up drilling activity that has produced the burgeoning levels of propane and other NGLs would soon disappear without a market paying to absorb them—namely exports. In addition, without exports, heightened production would certainly not continue as a mere rote function to simply shift surplus volumes into storage, if in fact sufficient storage capacity could be found. Finally, exporters underscore that just a short time ago the U.S. was an importer of propane, most pointedly for expensive winter heating season gallons. They emphasize that the shale revolution has resulted in a tremendous reversal of fortune for the nation’s balance of trade and the economy overall.

But explain that to marketers facing rapidly rising prices, costs that will have to be passed on to their customers, painfully in many cases. “It’s amazing we’re not building inventories when we have all this gas,” said Shannon McWhorter, president of Sequoia Gas Co. (Fortuna, Calif.). “Something is not right.” McWhorter is active in state-level issues and served as chairman of the Western Propane Gas Association in 2003-2004, a post previously held by his mother, Billie. The family-owned company has been operating for 72 years, and a third generation of McWhorters is now part of the enterprise.

On the opposite end of the country, Mike Mutter agrees with McWhorter on that issue. Mutter is manager of Eddinger Propane (Bally, Pa.) and is president-elect of the Pennsylvania Propane Gas Association. He also does not like to see producers exporting such high volumes, adding that oil companies are also exporting refined products.

“As long as they’re getting the highest dollar for their product, they’re going to ship it to wherever that is. It’s sad, and it’s not just happening in the propane industry. But again, it’s big business. Wherever they can get the most money for it is where they will sell it….” That being said, he notes that higher fuel prices negatively affect his customers.

Marketers are thinking about supply and the consequences of exports in the Midwestern states as well. Chris Tews of Dale Gas & Oil (Dale, Wis.) noted that the amount of propane exports and the effect that has on supply and price is “probably the biggest concern on my mind these days.”

“You throw a weak dollar in there, a dollar that’s getting weaker by the quantitative easing, and it’s such a bargain for these foreign countries to snap our gas up,” noted Tews, who is president of the Wisconsin Propane Gas Association.

Marketers and industry representatives who spoke to BPN also noted their concerns regarding issues such as industry consolidation and expansion of natural gas into rural areas. And regarding consolidation, smaller retailers are seeing an opportunity to market their services to a certain kind of customer.

Sequoia Gas in California has gathered up new customers whose former propane suppliers were acquired by a major propane marketer. McWhorter says pricing and service are two reasons he has heard for switching to a smaller propane company. “We’re a pretty small area here, but we’re changing out a lot of the majors’ customers,” he noted.

In Pennsylvania, Mutter has seen the same trend. His area includes a good population of “Pennsylvania Dutch,” an immigrant group of many generations that grew up in the same area. He maintains such groups like dealing with smaller companies that offer what he describes as more of the human touch. Mutter, whose company, Eddinger Propane, started out as a hardware store in 1890 and got into the propane business in the 1970s, contends that Eddinger can respond in a more timely manner to those customers’ needs.

McWhorter and Mutter have gained a great deal of new business from customers switching after a major marketer took over their propane company. But while their businesses have profited from this trend, they don’t necessarily see it as an overall positive for the propane industry. “I don’t really consider that growth for the industry, because all you’re doing is swapping tanks out,” McWhorter noted. “I would much rather see our growth fueled by housing starts and industry, rather than just swapping steel out.”

Consolidation is also affecting propane association membership. As companies merge, it’s observed that the number of individual companies represented decreases, although firms doing the acquiring may step up their number of representatives. Nonetheless, the diversity of representation is seen as declining. On the flip side of that in Pennsylvania, Mutter said he is seeing new players such as fueloil companies entering the propane industry, and that helps propane associations with new membership.

Expansion of Natural Gas

Marketers in rural areas are also concerned about the expansion of natural gas into their regions where the fuel hasn’t been available previously. Tews of Dale Gas & Oil noted the natural gas industry has cut into his customer base a bit, but he added that has been an issue for a long time and will continue to be an issue.

In Dale Gas’ Wisconsin service area, the natural gas industry got aggressive about 15 years ago with “yellow tubing all over the place,” Tews noted. That industry then backed off, but is now picking up the pace again. “I don’t anticipate that they are going to get aggressive on it, but it’s kind of death by 1000 paper cuts,” he said. “In general, we’re always concerned about natural gas growth.”

McWhorter agreed, noting that natural gas companies have more resources to achieve legislation in their favor, including recent legislation in Connecticut that would allow the industry to bill current and new customers for the cost of expanding pipelines. McWhorter feels the propane industry will suffer in that area because of price competition, and he is concerned the trend could move to additional states. He also feels the propane industry must continue to fight for parity with natural gas legislation in other areas such as residential and engine fuel use. “I think we need to be looked at as an equal, and not as a stepchild,” he stated.

Residential Recovery

Larger propane marketers have their own list of concerns going into 2014. The industry should focus on hooking up to burner tips, and marketers should not simply view their job as being a “pipeline on wheels,” said Stuart Weidie, president of Blossman Gas (Ocean Springs, Miss.). He explained that too many marketers think their job is to take gas from a big tank to a little tank at the customer’s site, and that the job ends there. But if only one or two propane appliances are inside to burn gas, then fewer gallons will be sold. Furthermore, prospective residential customers with no propane appliances in the home at all should be identified for marketing efforts.

The industry grew in the past because many marketers sold products that burn gas, increasing their gas sales, he explained. Now, too many marketers are focused exclusively on delivery productivity and taking gas from that big bulk storage tank to the little storage tank as efficiently as possible. Marketers are forgetting that customer tanks must be hooked up to as many gas-burning appliances as possible.

That “pipeline on wheels” strategy works financially for many companies, but it’s not healthy for the industry, Weidie believes. If marketers are not willing to work on selling appliances, they should develop relationships with hearth shops and other businesses that do sell them. “The big-box stores have no incentive or interest in selling propane products for us. So at some point, we’ve got to focus on burner tips, in addition to being a pipeline on wheels,” he said.

Supply Is a Top Issue

Mutter in Philadelphia noted the pipeline and terminal allocation restrictions on loading seen this fall and winter may mean less propane supply going forward into the heating season. He added that pipeline operators may also be shipping other products such as butane and propylene. “The gas is here. It’s just a matter of keeping it here,” he said. “I have a gut feeling that in order to keep it in Pennsylvania for the next couple of years, we’re either going to have to pay more for it or we’re going to have to travel farther to get it, which is sad.”

The Cochin Pipeline was a good source of propane for the Midwestern states, providing about 40% of the propane used in Minnesota, for example. But Kinder Morgan, which operates the pipeline, is in the process of reversing the line to move light condensate from Kankakee County, Ill. to terminal facilities near Fort Saskatchewan in Alberta. That reversal will be completed before next winter.

“That’s going to kill a good source of propane,” stated Tews in Wisconsin. Dale Gas’ location on the east side of the state means his company does not rely on that pipeline directly, but shutting off that supply will cause a ripple effect, forcing companies to come to terminals Tews does rely on.

“I don’t want to say it will be a fight for product, but there will be a large influx into some of these terminals that in the past was never there,” he said. “The Cochin Pipeline will be a big deal starting in March.”

Big PERC Projects: Residential, Ag, Mowing

Going into 2014, the Propane Education & Research Council (PERC) is working on its usual large number of projects. But the council ranks increasing residential business, promoting irrigation engines in the agricultural sector, and increasing its strong position in commercial mowing as top priorities.

For 2014, PERC plans to continue giving propane marketers the tools they need to work with builders and be more effective sales agents so builders use propane appliances in their projects, said Tucker Perkins, chief business development officer for PERC. The council’s Marketer Technology and Sales Training program, plus materials on its Propane MaRC website, are two tools to help with those goals.

“It’s working with builders to drive them back to marketers and marketers back to builders,” Perkins noted. “We have a lot of products, but it’s just a question of getting the marketers to respond and be effective salespeople.”

In the agricultural space, PERC will continue to promote irrigation engines, seeking to add more engines that use propane and add companies that are willing to distribute the products. Perkins believes the propane products fare well against existing diesel or electric engines.

PERC will continue working to increase propane’s dominance in the commercial mowing area. The propane industry strengthened its position further when this past October, John Deere introduced a propane conversion kit for some of its zero-turn mowers, stand-on mowers, and commercial walk-behind mowers. The John Deere move adds to the propane industry’s already-strong relationship with mowing equipment manufacturers Kohler and Exmark. “John Deere is a great brand with a loyal following,” Perkins emphasized.

Further encouraging news came in November when Vermeer announced the release of a bi-fuel wood chipper that can run on gasoline or propane. When tree trimming companies cut down trees and clear brush from the roadways, they use chippers to grind up the material for disposal. The chippers use a considerable amount of gas, sometimes running eight to 10 hours a day, five days a week. Mobark Inc. is another company that sells propane-powered wood chippers.

Autogas is a fourth area of focus, and the package delivery business is a new market with strong potential. Bakeries, linen companies, florists, and plumbers can also use the vehicles. The industry now offers step van chassis products through Freightliner, Ford, and Workhorse Custom Chassis. “Whichever chassis they choose, we have a propane-fueled option in the market,” Perkins stated. He believes the propane industry can extend its dominance in the school bus market as well. In addition, some new commercial construction products are on the horizon and expected to be launched this spring.

NPGA Works on Export Data, Vision 2014

Participants in the propane supply arena make strong, disciplined decisions when they have the information they need on which to base their decisions. But right now, the propane industry does not have timely information about propane exports.

Specifically, the industry knows how much prior-month and annual propane is being exported through the U.S. Department of Commerce, but it cannot source that information on a weekly basis. “That is providing a challenge for some marketers who make arrangements for their supply,” said National Propane Gas Association (NPGA) president Rick Roldan.

With that in mind, Roldan and other NPGA representatives met with representatives of the U.S. Energy Information Administration (EIA) in December. The EIA agreed that no regular, credible tracking of exports currently exists. EIA representatives at the meeting, which included EIA administrator Adam Sieminski, told the NPGA representatives that it is working with other federal agencies including the U.S. Department of Homeland Security’s Immigration and Customs Enforcement Agency on an international trade data system that would incorporate data such as propane exports. Roldan told BPN that the initiative is ongoing but that he does not expect it to be completed anytime soon.

Many industries in addition to propane would benefit from more timely and regular export data, he noted. EIA is working to come up with a “one-stop shopping” type of situation in which one agency collects all the export data and can share it more efficiently. Roldan supports that effort, but the agency noted the initiative would take about two years to complete.

“That’s not good enough for us, so internally we’re going to start having a discussion on how we might privately collect that data.” He added that those discussions would probably start with the Infrastructure and Supply Committee at NPGA’s February winter board meeting.

Also on the subject of promoting industry growth, Roldan noted the association continues to implement its Vision 2014 plan, and has already achieved some successes. The four strategic priorities of the plan are to advocate favorable parity with natural gas in public policy; to enact or promote growth legislation, regulations, and policies; to reduce the expense burden caused by government policies and decisions; and to elevate awareness of propane among policymakers and thought leaders in Washington, D.C.

Working toward those goals, NPGA has already “essentially prevailed on almost every issue we’ve touched,” regarding Vision 2014, Roldan stated. A legislative victory on decorative log sets and a delay on implementation of a crane rule are two examples. A federal appeals court in February overturned a decision by the U.S. Department of Energy to regulate decorative hearth products. Proposed regulations such as those cost propane marketers thousands of dollars, and that is especially true of the crane rule, according to Roldan. The most onerous of these changes required operators of cranes over 2000 pounds hoisting capacity to become third-party certified, and for the third-party organizations themselves to be accredited by a certifying body. After efforts from NPGA and other organizations, the Occupational Safety and Health Administration delayed implementation of the rule until Nov. 10, 2017.

“I can’t think of a rule in recent history that would have cost our members more money than having to comply with a one-size-fits-all crane rule that would have cost the average marketer, a one-bulk-plant marketer, thousands of dollars a year, and that one got put on ice, and we’re very close to getting the third-party certification requirement eliminated.”

He added that the Vision 2014 plan is “what we will be all about for the next three to five years,” and added that it is a “living plan” that the association can add to as time goes on. “If an issue comes up, we can put it on the list,” Roldan noted. “But the only way it gets on the list is if it saves our members a lot of money or helps us grow gallons.”—Daryl LubinskyA Major's Outlook: Amerigas

Paul Grady, vice president and COO for AmeriGas (Valley Forge, Pa.), responded to New Year’s outlook questions from BPN by stating that the industry has seen great benefits from being progressive in areas including autogas and commercial segments such as cylinder grill exchange. But he feels the industry should focus on gaining residential gallons, and he thinks the industry should continue pushing for restoration of PERC’s ability to conduct consumer education.

What are your feelings in general about the future of the propane industry as we enter the new year? How has your outlook changed expectedly or unexpectedly from a year ago?

Grady: “In my 24 years in the business, there have always been challenges to overcome. Going forward, our industry must stay relevant and continue to provide great energy solutions for our residential and commercial customers. The last year has not markedly changed my outlook. We battle strong competition from alternative fuels, but that has been a given since the early 2000s.”

How can the industry boost its residential business? Have you seen the effects of the recent rise in home remodeling?

Grady: “We have seen an increase in builder demand, particularly for custom homes and remodeling projects. The industry has a great opportunity to support this recent trend…. Call your congressman and press for the restoration of PERC’s ability to conduct consumer education. Since 2008, when PERC consumer activities were restricted, the consumption of propane for residential uses has declined. Now, billions of gallons of propane are exported to other countries. There is no valid reason for this restriction to continue.”

How can the industry boost business in the commercial and autogas sectors?

Grady: “Propane is the most versatile of all energy options. When I started, forklift fueling was really ramping up. Since then, we’ve seen new applications in lots of different commercial segments, including grill cylinder exchange, farming, irrigation and certainly on-road and off-road engine applications. I totally disagree with those who say our industry is not progressive. This is an entrepreneurial industry with many professional and innovative marketers. We must continue to innovate, with new products and applications, in order to build our business for the long term.”

What are some top issues the industry will have to deal with in the near future?

Grady: “Social media is rapidly evolving as a critical part of any marketer’s business plan. The industry grew up on word of mouth and the yellow pages. Today’s customers have tossed the yellow book for Yelp, Google Places, Facebook, and Twitter. American consumers expect to transact business today not just online, but on our cell phones.”

What are some interesting initiatives that your company is working on?

Grady: “One of our competitive advantages is that we have strong positions in many of the exciting areas in the industry: residential builders, commercial national accounts, grill cylinder exchange, autogas, mowing…and we are always interested and active in acquiring well-run marketers.”A Major's Outlook: Ferrellgas

Stephen Wambold, CEO and president of Ferrellgas (Overland Park, Kan.), responded to New Year’s outlook questions from BPN by stating that his optimism about the propane industry has increased over the past year.

What are your feelings in general about the future of the propane industry as we enter the new year? How has your outlook changed expectedly or unexpectedly from a year ago?

Wambold: “I’m responding to your question at a time when we’re enjoying some of the coldest December temperatures we’ve seen nationwide in many years, so my current feelings about the state of the industry could not be better. In all seriousness, though, I remain very optimistic about the future of the propane industry. It’s an optimism that has only increased from this time last year. A couple specific areas that have growth momentum are autogas and commercial lawnmowers.

“Both NPGA and PERC are staffed from top to bottom with the brightest minds we’ve seen in the more than 16 years I’ve been in the industry. Both are also blessed with tremendously dedicated volunteer leaders. Ferrellgas has a number of employees who are volunteering as well. I’m proud of their efforts and extremely happy to see we’re doing our part. Both NPGA and PERC are tackling myriad meaningful issues. Thanks to their efforts, the state of the industry has never been better.

“What gives me the greatest hope and optimism about our industry is the approximately 5000 marketers that comprise it. Collectively, this is a group that’s as tough-minded as ever. Despite any obstacles that are thrown our way, we always find a way.”

What are some top issues the industry will have to deal with in the near future?

Wambold: “While there is cause for tremendous optimism, there are a number of issues that stand in the way of the industry’s primary goal, which is to grow gallons.

“The ongoing Department of Commerce [DOC] restrictions faced by PERC is certainly one such obstacle. Despite the explanations that have been made to DOC leadership and despite the pleas for help we’ve made to members of Congress, the price calculation methodology that’s being used has not been changed. To enjoy the full benefit of our industry checkoff program, we need to be able to flex our full market outreach capabilities.

“Maintaining parity with natural gas and other alternative fuels at the federal and state levels are challenges as well. Competing industries have demonstrated they have significant lobbying dollars and capabilities. Our advantage is we have the best option available. Our industry is well aware of the fact that propane refueling infrastructure is a fraction of the cost of refueling infrastructure for compressed natural gas vehicles. We can’t become complacent. We have to work hard to continue to educate fleet owners, legislators, and anyone else who will listen that propane is far and away the best alternative fuel.

“We face challenges as an industry with regards to high product costs. We need to continue to focus on efficiencies that will allow us to keep prices controllable for the end user. Without this focus, we’ll see increased conservation in the residential segment, something that’s been eating away at us for years. I think the industry in general has done a terrific job here, but I think we have further opportunities.

“Finally, our need to continue to focus on safety only heightens every year. Ferrellgas suffered a terrible tragedy in July in Florida. It was yet another reminder to my company, and to the industry as a whole, that we are always at risk and that there is nothing more important to focus on than safety training and education.”

How can the industry boost its residential business? Have you seen the effects of the recent rise in home remodeling?

Wambold: “There are a number of exciting new growth opportunities in our industry, including and especially autogas and commercial mowers. But, ours is an industry that was built on the residential gallon, and we must continue to focus on the tremendous opportunity that exists there. I believe we are.

“For starters, we have to increase the number of burner tips in existing homes. The number of homes that use propane for space heat but electricity to heat water is staggering. There are immediate opportunities there. Same goes for replacing electric clothes dryers with propane models.

“One smart approach—and I know PERC has plans in place to address this—is to establish relationships with the builders who are piping the homes and installing the appliances. We have to make the successful appeal to them that propane appliances are the best, most economical, and most environmentally friendly solution for homeowners.”

How can the industry boost business in the commercial and autogas sectors?

Wambold: “I mentioned previously the DOC restrictions. It’s certainly hurting our ability to fully educate end users about the many benefits of propane. Despite this challenge, we can—and we must—continue to educate key stakeholders via more grass-roots efforts, and we must continue to invest in new technologies that will open doors to new propane-using consumers in both the commercial and autogas sectors.”

What are some interesting initiatives that your company is working on?

Wambold: “Ferrellgas remains focused on growing our business both organically and via acquisition. We celebrate our 75th anniversary in 2014. We’ve grown over the years by purchasing small “mom and pop” propane companies and we remain focused on strategic acquisition. We’re also interested in diversifying our business lines like we did with our acquisition of grilling parts and accessories company Mr. Bar-B-Q.”

More Than 95 Companies Now Part of AutoGas Coalition

In the mid-2000s, Blossman Gas (Ocean Springs, Miss.) began work to get the autogas industry moving again. But the company realized it needed a nationwide presence to serve fleet customers who also had a nationwide presence. It formed Alliance AutoGas (Asheville, N.C.) in 2009, and Blossman and Alliance president Stuart Weidie describes the group as a marketing cooperative that brings together the complete chain of aftermarket conversion equipment: vehicle technology; conversion centers that employ certified installers and provide the aftermarket maintenance and support to fleet customers; and refueling equipment and fuel suppliers.